If you’re planning to buy a business, you need to be ready to negotiate the purchase price, in conjunction with your attorney or financial advisor. The seller will want to get a price close to his or her asking price, as well as a smooth transition with few hurdles.
As the buyer, you’ll want a good price with terms that have the seller cleaning up loose ends. While the details of the transaction, including liabilities, warranties, and other responsibilities, are all part of the negotiation process, the price is always the main consideration.
To negotiate a fair purchase price, both sides must determine what the business is worth now and in the future. To begin calculating a valuation, consider the tangible goods and the assets of the business, minus the debt. The more difficult assessment will be in areas such as goodwill, customer loyalty, and other intangibles. It is here that both sides need to substantiate their valuations before negotiatiating.
The seller’s asking price is a jumping-off point, and it will give you an idea of whether the business is within your price range. From there, you’ll take into consideration several factors when negotiating a price, including:
- Why the seller is selling the business. If, for example, the seller is selling for financial or personal reasons, you have more negotiating power. However, if the seller knows that the business is at its peak and anticipates bids from a number of potential buyers, you won’t have as much leverage.
- Transition. If the seller is willing to stay on to help with the transition — which may help in maintaining steady customers — this may be worth more to you as a buyer.
- The economic climate. In a good economy, it’s easier for the seller to hold out for more money. But in a weak economy, the buyer has the advantage. The economic climate will almost always affect the terms of the sale.
- Your reason for buying. While you may not reveal this during the course of the negotiations, you must consider your own needs. The more you want the business, the more concessions you must be willing to make. But if you own several businesses and only want to purchase businesses at good prices to turn them around, it will be easier for you to walk away.
- What is being sold. Consider exactly what you are buying before negotiating a price. Is there real estate involved? Are there additional assets in other locations? Can you buy the business without additional assets or the real estate?
- The growth rate of the business. How fast is the business growing? Are the seller’s financial projections realistic?
- Comparable sales. Research what other, similar businesses have sold for. Are similar businesses selling for three times or two times the annual revenue? Are they selling for five times EBITDA (earnings before interest, taxes, depreciation, and amortization), or seven times?
These are just some of the key points when negotiating the purchase price of a business. As a buyer, you’ll have a price at which to start negotiating and a price you can’t exceed, based on the financing you know you can obtain. Within these two prices lies the negotiating room. Like a chess game, you can move forward or back based on what the seller offers in terms of concessions, and what you can offer back.
Take your time when negotiating the price. List the key negotiating items in separate categories, including those on which you can compromise and those which are imperative to your success in the business. Then compromise on issues that are not deal-breakers, and hold on tight to your have-to-haves. Be prepared to either shake hands and strike a deal, or walk away from the deal if you cannot negotiate what you both consider to be a fair price.